ASX small caps with a blue-chip profile: Macmahon Holdings

The world's biggest central banks are set to reverse a record string of rate hikes and stocks towards the small end of town are widely expected to benefit. In this series, we're going to take a deep dive into profitable micro/small caps with unique businesses, strong balance sheets and a positive outlook.

Macmahon Holdings (ASX: MAH) is a diversified contractor specialising in mining and construction services across Australia and Southeast Asia. Historically capital intensive, it now diversifies into capital-tight sectors like mining support services and civil infrastructure. The company services several household resources names including Newmont, Red 5 and Anglogold Ashanti.

Macmahon at a glance

• Market cap: $480 million

• Cash on hard: $200 million as at 31 December 2023

• Debt: $212.4 million

• Shares on issue: 2.15 billion

• Share price performance: Up 23% year-to-date and 57% in the past twelve months

• Management: Chief Executive Michael Finnegan has been in the position since November 2016 and beneficially owns 5 million shares in the company. He has over 20 years of experience working in senior line management positions within the mining industry.

Macmahon 12-month price chart (Source: Market Index)

Latest results

In response to the latest set of half-year FY24 results, Macquarie said it was "solid with an increase in margins seen year-on-year. Revenue guidance has been upgraded and margins should continue to grow in the second half." The analysts had an OUTPERFORM rating on the stock with a 25 cent target price.

• Revenue +2.1% to $966.3 million (cycling completion of major project that contributed $150m in 1H23)

• Underlying NPAT(A) +33.6% to $39.7 million

• Statutory net profit after tax +56.7% to $36.5 million

• Underlying operating cash flow +31.0% to $138.2 million

• Order book of $4.4 billion (FY23: $5.1 billion) with tender pipeline of $11.6 billion

• Interim dividend +50% to 0.45 cents per share

• Upgraded full-year revenue guidance to $1.8-1.9 billion from $1.7-1.8 billion.

Interesting observations

Earnings mix: Macmahon's first-half FY24 revenue mix suggests the business is heavily reliant on gold mining clients (which might be a good thing as gold prices soar to all-time highs of more than US$2,200 an ounce).

Source: Macmahon Holdings

Margin aspiration: Macmahon's EBIT margin recovered to 7.1% in the first-half of FY24, up from 5.4% a year ago. Prior period margins have been hampered by factors such as the pandemic, labour shortages and cost inflation. The company continues to target a medium-term EBIT margin of 8% and also lifted its ROACE (return on average capital employed) from 15% to 20%.

Source: Macmahon Holdings

Mining service valuations: A recent presentation at Euroz Hartleys Rottnest Conference (13 March) observed that capital light resources and infrastructure contractors trade at materially higher multiples than capital intensive contractors. In 1H24, Macmahon derived approximately 75% of its revenue from capital intensive services, down from 95% in FY18. The company's target revenue mix involves bringing capital intensive segments down to around 66%.

Capital allocation: When I first saw Macmahon's cash position and market cap, I thought "wow what a cashed up business". That thought process pulled a quick 180 after I scrolled past the debt numbers. Understandably, the company needs such debt and liquidity to service its capital intensive services.

As the company puts it, the increase in debt was "primarily due to the increase in sustaining equipment together with working capital to support the commencement of Greenbushes and ramp up of existing projects." The chart below puts into perspective the amount of leverage and debt the company has taken on in recent years.

Source: Macmahon Holdings

Macmahon vs. gold prices

Considering the company's dependence on gold-related clients – I thought I'd plot its price chart against gold. The level of correlation between the two might come as a surprise.

Macmahon share price chart (blue) vs. Gold price chart (yellow) | Source: TradingView

Disclaimer – The author does not own any shares in Macmahon. Market Index is not affiliated with any of these companies. The information provided in this article is for educational purposes only. It is not intended to be a substitute for professional advice or recommendations. Always conduct your own research and consult with a qualified processional before making any decisions.